Rig counts across Texas oil fields is a commonly used metric to gauge the health of the state’s energy sector, particularly as an early sign of a potential boom or bust. Most recently, the number of oil and gas rigs across Texas fields is up roughly two fold from the tally counted a year ago. That’s good news for the Lone Star State, where the oil and gas industry has an outsized impact. For smaller, oil-dependent markets like Midland/Odessa, the health of the energy sector drives the health of the local economy and, therefore, apartment market performance. With progress in the energy sector, revenue growth has returned to Midland/Odessa’s apartment market.

MPF Research has covered the evolution of the Midland/Odessa multifamily sector to understand how apartment fundamentals respond to oil prices, which fell from triple digits to, what appears to be, a stabilized price between $40 and $50 a barrel. As the Permian Basin is home to one of the nation’s largest oilfields, let’s examine how the last three years have panned out for the metro at center of the Permian Basin, Midland/Odessa.

The State of the Energy Market

As oil prices have stabilized in the last year, the statewide rig count has rebounded, with the tally standing at more than double the level seen a year ago, according to the March 31 Baker Hughes report. As of the publication of that report, the Texas statewide rig tally rose to 411. Breaking down that statewide number, the Permian Basin added 120 new rigs in the 24 weeks ending March 2017. Those gains pushed the rig count across the nation’s most active basin to 319 units, according data compiled by Baker Hughes. Employment levels are influenced by the number of active rigs, which require laborers to operate and support operations at the well sites. Unlike the current rebound in rig investment, employment in Midland/Odessa continues to lack any consistent momentum that could help instill a broad based turnaround, a variable closely tracked by real estate investors and operators. Total nonfarm employment remains more than 13%, or 23,800 jobs, below the 2014 peak.

State of the Apartment Market

Unlike the quick response typical of energy industries to changing fundamentals, housing development was slow to respond to the wave of demand that quickly emerged and the sky-high rent gains that registered across the Petroplex during the run up.

Fundamentals quickly deteriorated and absorption turned to net move-outs following the 2014 summer peak in crude oil. The more than 2,150 new apartments that came online in the three years ending 1st quarter 2017 were slow to finish construction amid the energy sector’s bust phase. When they did, those new units faced meager lease-up prospects, evident by just 1,746 units being absorbed during that three-year period. The Petroplex saw annual move-outs spike from 3rd quarter 2015 through the first half of 2016, preceding the rebound in oiler activity. Consequently, occupancy declined from 2nd quarter 2014’s reading of 97.9% to just 89.9% in 1st quarter 2016, dropping an average 1.1 percentage points in each quarterly period over that time frame. Similarly, annual rent change turned negative in the last three quarters of 2015 and in 2016, averaging annual rent cuts of roughly 16.5% per quarter.

As energy prices have displayed a stable trading range between $40 and $50 a barrel, apartment markets appear to have begun to respond. Midland/Odessa recorded annual demand for 1,764 units in 1st quarter 2017. That’s up from the 871 net move-outs seen a year earlier. Likewise, annual completions totaling 619 units remain above local norms but down from the four-digit volumes seen from the end of 2014 through mid-2015. As a result of reemerging demand, in concert with seemingly manageable supply volumes, both occupancy and rent growth show positive momentum. Occupancy registered at 95.5% during 1st quarter 2017, up 5.6 points on an annual basis. Given limited construction activity and the recent absorption surge, rents fell only 3.8% on an annual basis. That follows seven quarters of annual cuts ranging between roughly 6% and 23%. Rent performances have continued to show improvement, with operators raising rents on an annual basis in April 2017, according to Axiometrics, a RealPage company.

The Status

While the rig count is not the telltale sign of where the Petroplex’s economy will go, it is a useful gauge. The energy sector influences the direction of both the local economy and multifamily sector in Midland/Odessa.

While dependent on the volatile oil and gas industry, the recovery across the general economy in the Midland/Odessa area is gradually gaining momentum. The supply and demand relationship in the multifamily sector is starting to exhibit a return to normalcy, following progress in the oil and gas industry.